Aussie Dollar is "Done For"

A few days ago I did a post on how the world is awash in debt.  The chart the article featured clearly showed that Australia and Canada had little national debt as compared to other Western nations.

I mentioned that some traders were keeping an eye on those currencies as a storehouse of value.

Today I received an email from a money manager and he claims the Aussie dollar is going to suffer.

For starters, the U.S. variations have a lot to do with our massive debt creation and money printing. The Aussie’s headaches have to do more with rising and falling exports and foreign trade.

Our foreign trade is around 10% of GDP, much lower than most emerging countries, like China or most European countries. 

For example, China and Germany’s foreign trade have been running as high as 35% of their GDP recently. South Korea is the highest at 50% of GDP. 

Australia’s foreign trade has run at between 20% and 24% of GDP in recent years. That’s as much as double that of the U.S.

When countries with high exports, like China, Germany, South Korea, and Australia, see them rise, they accumulate foreign exchange reserves and so their currencies rise in value. Unfortunately, that ultimately hurts the very exports that created such reserves and so exports tend to fall again.

Besides that, there have been two trends in particular that have driven the Aussie dollar to new heights since 2001. Commodity prices have seen a bubble that peaked in mid-2008, and China has increased its Australian imports from 6% to 30% as it inflated its massive bubble. In fact, Australia’s exports to China alone are responsible for 6.3% of its GDP.

These twin China and commodity bubbles have been the biggest factors driving the Australian dollar up, and they’ve been a big factor in the country’s strong economy, including its greater resilience in the 2008 global financial crisis.

But if the China bubble bursts, as I believe it will, then Australia could see 3% of its GDP growth suddenly disappear. That right there would put the land down under in a recession.

But, of course, there are other, indirect impacts of the China bubble bursting. For example, it would put downward prices on the very industrial commodities that Australia largely exports — like iron ore and oil — as it consumes 40% to 50% of these commodities, globally.

That’ll hurt Australia’s gross exports even more. And profit margins will shrink even more painfully, especially because their costs to mine, work, and export the commodities won’t change much.

The China bubble burst would also hurt Australia’s next two largest trading partners, namely Japan and South Korea. Next thing you know, the rising exports that helped catapult Australia’s dollar from as low as 48 cents to as high as $1.08 will see a larger crash.

If you look back to the chart above, you’ll see that the Aussie dollar dropped sharply in 2008, sliding from 98 cents to 62 cents to the U.S. dollar. That was largely thanks to commodity prices crashing.

I see the Aussie dollar falling further still… all the way back down to around 62 cents to the U.S. dollar by 2015 or 2016, and then possibly as low as 48 cents to the U.S. dollar again by 2020 to 2023, when commodity prices are due to bottom on our 30-year cycle.

And the pending bubble burst in China will only add momentum to this collapse.

More evidence that NO ONE HAS ANY CLUE as to how this debacle may all play out.  The very thing that makes Australia's money attractive could end up hurting it's exports (cuz things cost too much to buy from Australia) and slash over 3% of its GDP.

Maybe all the currencies are going to take a big drop...and then serious calls will come in from around the world to create a GLOBAL CURRENCY?